What Are Business Incubators?

In the context of business finance, an incubator has nothing to do with hatching eggs. It’s an office space where startup companies are helped to grow by providing them guidance and counsel in a controlled environment until they’re ready to hatch.

In recent years, there has been an explosion of incubators around the United States, many of them sponsored by venture capital groups. Entrepreneurs compete to be accepted into an incubator, and the competition is fierce.

In many cases, winning a spot in an incubator is tougher than securing capital. (For example, the Y Combinator incubator in Palo Alto, California, accepted only 2 percent of applicants for its May 2012 class.) The entrepreneur must live in (or move to) the city where the incubator is located and work under the direct guidance of the sponsoring venture capitalists.

The goal of an incubator is to have the entrepreneur hash out the proof of concept, build some customer traction, and start generating revenue so the business can be self-sustaining. The entrepreneurs who participate often are rewarded handsomely. According to Harjeet Taggar of Y Combinator, about 75 percent of that incubator’s recent enrollees raised convertible debt, and in a recent class, the capitalization averaged about $10 million.